Mark-to-market

Treating open positions as if sold at fair value on the last day of the tax year. Section 1256 contracts are marked to market, which is why they are generally not subject to wash sale rules.

Mark-to-market means unrealized gains and losses on open positions are recognized at year-end. For flippers who close everything before December 31 it rarely changes the result, but it is the mechanism that makes 1256 contracts exempt from wash sale tracking.

Mark-to-market means valuing an open position at its fair market price on the last day of the tax year, as if you had sold it, and recognizing the resulting gain or loss for that year. It is a core feature of Section 1256 treatment: those contracts are marked to market annually whether or not you actually close them.

The mechanism has two consequences. It can create gain or loss on positions you still hold at year-end, which is why some traders flatten their books before December 31 to keep things simple. And because gains and losses are recognized every year regardless, it removes the loss-deferral problem that the wash sale rule was written to prevent, which is why mark-to-market contracts are exempt from wash sale tracking.

For an active flipper who closes nearly everything the same day, mark-to-market rarely changes the math, because there are few open positions at year-end. It matters most for traders who carry positions across the calendar boundary, where an unrealized move becomes a realized tax event on paper.